Oreo maker pays crumbs in taxes

Oreo cookie lovers have long debated whether to eat the filling or the cookie first. Now the company that makes this iconic cookie is the middle of a more serious debate about jobs and taxes.

Mondelez International (MDLZ), the company that owns Nabisco which makes the Oreo, has come under fire from both Republican and Democratic presidential candidates over a recent decision to lay off 600 Chicago workers to move production to Mexico. The shift gets to the very premise of why companies take such actions - to lower costs including taxes.

The difference is significant. Mondelez reported an effective tax rate, or income tax expense divided by earnings before taxes, of 7.5% last year, according to the company's regulatory filing. It wasn't just a one-year fluke, either. The company has consistently paid tax rates lower than the U.S. federal statutory rate of 35%. Mondelez' effective tax rate in 2014 was 13.8% and just 2.5% in 2013.

Such low tax rates gives the company a cost edge over rivals like General Mills (GIS) which reported an effective tax rate of 34% over the past four quarters and Kellogg (K), which paid an effective tax rate last fiscal year of 21%.

Shifting business overseas gives companies some big cost advantages. Mondelez' lower effective tax rate "likely reflects the large amount of their business that is outside the US and is subject to lower rates," says Michael Lavery of CLSA, a stock research firm.

Mondelez' is very transparent about the tax benefits it gets. The company reconciles - in detail - the difference between its effective tax rate and the U.S. federal statutory rate. For instance, in 2015 the company got a 26.9 percentage point tax benefit from the sale of its coffee business to create a new coffee venture in a move that created a large gain without incurring a tax effect. It got another 2.5 percentage point break due to lower tax rates at companies it works in.

The fact Mondelez does so much business outside the U.S. offers much of the tax benefit, says Michael Mitchell, spokesman at Mondelez. "It should be noted that about 80% of our business comes comes outside the U.S., where tax rates are generally lower," he says. The company's annual filing shows Mondelez' effective tax rate was lowered by 2.5, 14.5 and 16.3 percentage points, respectively, due to "foreign rate differences" in 2015, 2014 and 2013.

Mondelez, though, doesn't expect its tax rates to remain as low as they've been in recent years, Mitchell says. The company tells investors to expect a more normal effective tax rate in the "low-to-mid 20s," Mitchell says. That rate "reflects the combination of statutory tax rates in the places where we make money," he says.